Glowing Reits Could Begin To Dim

Money Talk

November 24, 2002|By MATTHEW LUBANKO Columnist

Q: My financial adviser has recommended that I buy shares in the Van Kampen Real Estate Securities Fund. Is this fund any good? And is it a good idea for me to invest in a sector fund? Or should I avoid such concentrated bets?

A: Real estate management companies have been one of the few bright lights in a stock market that's been dim for almost three years.

Many REITs, or real estate investment trusts, have gone up in price. Many pay generous dividends. And just about all have benefited from declining interest rates and hot real estate markets.

Within this favorable environment, the Van Kampen Real Estate Securities Fund (ticker symbol: ACREX) has performed with splendid mediocrity. During the past two and five years, it has trailed the major indexes that track the performance of REITs.

Yet during those same periods the Van Kampen Real Estate Securities Fund has outperformed stocks, in general -- and a majority of REIT mutual funds.

The future, however, might not be so relatively prosperous for REITs, market observers say.

Many real estate markets have already hit their peaks, and have started to skid. A prolonged economic slump might also lead to corporate bankruptcies, broken leases and uncollected rents down the road.

Interest rates have also hit 40-year lows in recent weeks, and real estate buyers and developers won't have access to low-cost loans forever, some analysts contend.

"Market conditions have deteriorated on many fronts. That's why I think positive returns from REITs -- if there are any -- will come primarily from the dividends," said David Harris, a REIT analyst with Lehman Brothers in New York.

Relatively high dividends provide REIT investors with a cushion. They draw new investors when REIT prices fall and yields consequently rise; quarterly dividend checks also provide some assurance that the past profits were real.

But yields by themselves cannot sustain a REIT rally that's heading into its fourth year. That upward push has to come from investors.

And the investing masses are a notoriously fickle lot. They tend to chase what's hot. They sometimes get so enamored with an industry that mutual fund companies create new sector funds to cater to this fad.

But the fad doesn't last forever. And when the fad ends -- as it might for REITs -- late-arriving investors pay the heaviest toll.

Hot sectors -- History is filled with examples of newly created sector funds that later turned sour.

There were financial service funds in the late 1980s. There were biotechnology funds in the early 1990s. Then came tech-stock funds of the late 1990s.

As recently as 1995, there were just 35 technology-based mutual funds. But as tech stocks drove the markets to new heights, the industry responded with a flurry of new funds. By September 2000, there were 286 tech-stock mutual funds, according to Lipper Inc.

More recently, investors have chased REIT stocks. There were just 72 REIT funds in 1998; now there are 156, according to Lipper. This proliferation of REIT funds has positive and negative implications for would-be investors.

On the one hand, it shows that investors have discovered the virtues of REITs.

It means that REITs, once dismissed as fringe investments, have entered the mainstream of portfolio management.

Yet the emergence of specialized real estate funds might also suggest that REITs are at or near a peak.

"The rapid growth of one sector can be seen as a contrary indicator of future performance," said Russ Kinnel, an analyst with Morningstar Inc. in Chicago.

By the time the investment industry creates new sector funds to meet the burgeoning demand, the best times for that sector have often passed, Kinnel explained.

Cooling trend -- Today commercial real estate is one such segment that might already have seen its best of times -- at least for the time being.